Saturday, November 15, 2008

Disaggregating Consumer Spending Further

Contrary to the view of many people (mostly Keynesians) that consumer spending is what drives the economy, consumer spending as a share of the overall economy tends to move in a counter-cyclical way, which is to say it falls in relative terms during booms and rises during busts. I recently discussed how cars and other durable consumer goods are a exception to this rule as they tend to move in a pro-cyclical way, which is to say they rise during booms and fall during busts. But as I pointed out, this is only because they are in important aspects similar to investment goods and as overall consumer spending still moves in a counter-cyclical way in relative terms, this only implies that non-durable consumer goods and consumer services are even more counter-cyclical in relative terms.

Even non-durable consumer goods and consumer services however tend to see its growth rate rise in absolute terms during booms and fall during busts. This is because the bust in investment goods and durable consumer goods reduces overall effective production capacity so much that it overshadows the relative boom of non-durable consumer goods and consumer services. However, there are in fact some consumer goods that are counter-cyclical not just in relative, but in absolute terms as well. This include very cheap forms of food, such as noodles, baked beans and spam (not the infamous form of e-mail, but the food), which rises in demand during economic slumps, as the number of people who feel they cannot afford more expensive forms of food.

As Greg Mankiw points out, such goods are called inferior goods, which is not meant as a perjorative terms but as a way of describing its income elasticity

And so, we can divide up consumer spending in three categories:-Durable goods which are pro-cyclical in both relative and absolute terms.-Most non-durable consumer goods and consumer services which are counter-cyclical in relative terms but pro-cyclical in absolute terms.-Inferior consumer goods, which are counter-cyclical in both relative and absolute terms.

2 Comments:

newson said...

"consumption is two-thirds of gdp" is the justification for all manner of crazy political initiatives. i still believe that more effort should be made by austrians and their sympathizers to explode the cult of gdp.until keynesian metrics are questioned, keynesian conclusions are going to be accepted by the populace.reisman, shostak, jackson and corrigan are the only austrians who seem interested.

Newson, you and I have discussed that topic before and I have explained why I disagree with them. To the extent GDP is misleading, it is in fact because it overestimates the level of investments and savings by not deducting capital consumption (which by contrast the concepts of Net Domestic Product and National Income does).

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